Market professionals are often asked one primary question by private investors, City outsiders and journalists which is –
“What is the magic formula for investing?”
The reality is that there is no philosopher’s stone for the stock market and that “trader coaches, soothsayers” etc will categorically NOT give you this secret. There are no magic formulas that will guarantee a winning trade every time and there are very few (if any) infallible investors that you can slavishly follow to make your fortune. Sorry to be the bearer of bad news!
The secret to succeeding at investing is not really a secret at all. We will give it you for free here and so save your money instead of attending these bullshit seminars (I went to one for the fun of it today run by a well known training company – my verdict? It is so shocking that it borders on the criminal).
In fact, the rules that create a framework for successful or profitable investing are those with which even novice investors will likely be familiar. Whether they choose to follow them of course is another matter entirely…
Here they are:
1. Firstly do your homework.
Before investing your hard earned money surely it makes perfect sense to understand the prospect that you are investing in and, perhaps more importantly, to understand what the drivers of a change in the price or valuation of that instrument are likely to be? The more research and background checking you do the better. Fact.
From a technical perspective, it might also be considered sensible to be aware of the historical price performance of the instrument in question, for example the 52 week high and low. If the investment in question is a share, then be aware of when the company is due to report and have an understanding of what they reported last time round. You’ll be amazed how few people actually do this.
2. You need to understand why you are invested and have a plan.
What is your expectation for the investment? Over what time horizons? What return are you looking for from the investment? Conversely, you should also consider what is the maximum drawdown or loss that you are willing or able to accept from the trade?
As the saying goes – “fail to prepare, then prepare to fail”.
3. You should consider your timing and, by default, where leverage is involved, the application of that leverage.
This is not always that straightforward, but you should give some consideration to where you are in the possible “life cycle” of a trade. By this we mean consider whether you are an early adopter i.e. one of the first investors into the trade, perhaps in the expectation of a catalyst causing a re-rating that “the market” is not really aware of.
You may in fact be entering the trade mid cycle (and so leverage levels will be different). Perhaps when a clear directional trend has emerged or when recent events have attracted broker or press comment, which is drawing more investors into a trade as an example (personally here at Titan we like to look for catalysts and are generally lightening our load at this stage).
Finally are you “tail end Charlie “? Are you entering a crowded trade which is approaching the end of its life? As you invest are the early adopters and mid cycle traders getting out?
However the golden rule to all investing is one which to some will sound like a cliché.
4. “Run your winners and cut your losses”
Too often investors do exactly the reverse of this golden rule and snatch at a quick profit whilst holding on to loss making positions in the hopes that they will turn around. We have all been there and we ALL do it.
There is a time to hold onto losing positions however and this is if the fundamental reason for being invested there has become more compelling with the price fall. For example, let’s say you are in a pharmaceuticals stock trading near the bottom of its historic valuation band and you expect some pipeline drugs news to be a positive catalyst. Absent the arrival of the catalyst let’s say the overall market endures a tumble on geopolitical news. To us, this is a renewed buying opportunity not a reason to sell at an arbitrary 10% loss level.
The decision to “hold or fold” should therefore be made within the context of your original plan for the investment. Ask yourself what if anything has changed? Do you still believe your original thesis?
If you can follow these rules in a disciplined fashion then you may be on the way to giving yourself a sustainable winning edge in the market. That is to make consistent profits that more than outweigh your losses. Over time even a small sustainable winning edge will mean that your portfolio could grow significantly.
Let’s look at the our flagship Titan Global Macro fund as an example of how this will work in your favour.
The table below details the performance of the Titan Global Macro Fund since July 19th 2013 to the close of business on Monday 21st July 2014. During this period the fund has executed a total of 353 trades of which 112 were closed with a profitable outcome, whilst 83 were closed at a loss, the rest are of course open trades.
The closed trade Win /Loss ratio is thus 1.35 times or, should you prefer, 135%. The incremental driver of returns however is the profit:loss ratio of 1.622. That is we made 1.622 times more profit than loss over the analysed period.
In fact, if you make a profit just 101 times and lose 99 then as long as your profit is a pound greater than your losses you will of course make money over time. Some of the best traders in the world only have a win/lose ratio a little over 1 times but yet they make money overall. Vice versa if you lose 101 times and make only 99, as long as your average profit exceeds you average loss by 25 you will also make money.
Over time that winning edge means the portfolio will experience growth in value and its one the main reasons that the Titan Global Macro fund is up substantially since its inception in July 2013 (see chart below)
Past performance is not necessarily a guide to the future.
So, the next time you receive a phone call from a CFD “advisory” firm or a trader training outfit, ask them to supply you their record with REAL money.
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